Fedcoin from the US Federal Reserve or Britcoin from the Bank of England? (Source: Getty)

Jasper Jolly

Central bank cryptocurrencies could cause deposits to flow out of traditional banks and endanger the stability of the financial system at the next crash, according to an influential central bank body.

The Bank for International Settlements today warned moving into issuing digital currencies would move central banks like the Federal Reserve and the Bank of England into “uncharted territory”, with the prospect of “digital runs” on banks in times of stress.

Jacqueline Loh, chair of the markets committee at the BIS, said: “A general purpose central bank digital currency could impact bank deposits, a major source of funding for commercial banks, with implications for financial stability.”

The report warns that a cryptocurrency backed by ultra-safe central banks would be too tempting for investors if other assets were losing value in a financial crash.

This could lead to the central bank having to take a greater role in allocating economic resources, fundamentally altering the relationship between the public and the private sector, the report added.

The committee on payments and market infrastructures at the BIS, often referred to as the central banks’ central bank, analysed the options for a digital currency targeted only at wholesale banks as well as one available to the entire population.

The report said there is a “high bar for changing the current monetary and financial structure”, given that is has “served the public and the financial system well”, in its judgment.

It said the distributed ledger technology underpinning cryptocurrencies could be used to raise the efficiency of securities and derivatives transactions. Currently such transactions use a massive and complex web of critical infrastructure – much of it based in London – which could in theory become defunct (or at least see major reductions) if the need for a trusted middleman is removed.

However, the report found the new clearing models are at this point “not clearly superior” to the existing model.